VRAIN Solution,Inc.

The AI business market, which is the Company's business domain, is expected to grow going forward, but if the pace of market growth slows significantly, it could have a material impact on the Company's business and results of operations. A similar risk could arise in the DX market for the manufacturing industry, depending on industry conditions and the degree of DX adoption. The Company seeks to mitigate this risk through diversification via the provision of two solutions and by continuously reflecting market analysis in its management strategy.

Rapid technological innovation in the IT industry and the emergence of alternative technologies or generic competing products could make it impossible for the Company to maintain the competitiveness and added value of its services. In such a case, this could have a material impact on business results through a decline in new orders and a decrease in contract renewal rates. The Company is working to maintain its competitiveness by combining open technologies such as machine learning, deep learning, and natural language processing with its own proprietary technology.

In addition to existing competitors, new entrants also exist in the Company's business domain, and the Company's competitive advantage could be threatened by the entry of major companies with financial strength and brand power. If competitors emerge that surpass the Company's competitive advantage, this would have a material impact on its business and results of operations. The Company addresses this through differentiation via one-stop services leveraging its extensive expertise in the manufacturing industry, and by strengthening its brand power through fundraising.

Achieving high growth and high profitability requires securing excellent personnel in sales, strategy, technology, and corporate functions; however, competition in the hiring market is intensifying, and a certain number of employees have left the Company. As the organization is small, with 97 employees, dependence on each individual officer and employee is high, and if it becomes difficult to secure personnel, staff reinforcement and organizational expansion would be constrained, having a material impact on the Company's business and results of operations. The Company is addressing this through improvements to the working environment, enhanced recruitment efforts, and the strengthening of internal training systems.

In selling AI systems, the Company provides one-stop production and installation of imaging equipment such as cameras and sensors, as well as inspection devices; however, delivery schedules may fluctuate due to specification changes requested by customers or postponement of system installation due to production priorities. Such fluctuations in delivery timing cause fluctuations in the timing of revenue recognition, which has a material impact on business results. The Company is working to prevent discrepancies by thoroughly confirming specifications at the time orders are received.

President and Representative Director Yusuke Namba, as the founder, plays an important role in formulating business strategy and utilizing industry connections, and the Company's current dependence on him is high. Should he become unable to continue performing his duties for any reason, this could have a material impact on business operations. The Company is working to reduce this dependence through strengthening its management structure and developing and hiring management personnel, but efforts remain a work in progress.

In the course of its business, the Company handles confidential information related to the technology and products of client companies, and if information leakage occurs due to unforeseen circumstances, this could have a material impact on the Company's business and results of operations through loss of social credibility and the incurrence of litigation costs and damages. The Company strives to build a management framework through the development of internal regulations, employee training, and continuous improvement of security systems.

As the number of officers and employees increases along with business expansion, the risk of misconduct such as bribery, embezzlement, and insider trading increases, and rapid business expansion may outpace the development of internal control systems. If legal violations or misconduct occur, this could have a material impact on the Company's business and results of operations. The Company addresses this through the establishment of compliance-related regulations and ongoing awareness activities for all officers and employees.

At present, there are no direct or specific legal regulations restricting the Company's business, but if new legal regulations related to AI or IoT are established in the future, or if the application of existing regulations changes, the Company's business operations could be constrained and additional compliance costs could arise, potentially having a material impact on business results. The Company is addressing this through strengthening its legal compliance framework and continuing internal training.

In the AI system business, the Company has significant dependence on Tokai Tsukemono Co., Ltd., which accounted for 11.6% of the Company's net sales in the fiscal year ended February 2025. If transactions with this customer are suspended or reduced due to changes in the customer's business environment or strategy, this could have a moderate impact on the Company's business and results of operations. The Company is addressing this by developing new customers and pursuing a balanced portfolio in its management approach.